Tesla Surpasses $1 Trillion in Market Value as Hertz Orders 100,000 Vehicles

Hertz’s major bulk purchase could help Tesla get more of its cars into the hands of mainstream consumers

By Dave Sebastian

Hertz said that, starting in early November and expanding through the end of the year, customers will be able to rent a Tesla Model 3 at airports and other locations in major U.S. markets and some cities in Europe./ PHOTO: CINDY ORD/GETTY IMAGES


Tesla Inc. TSLA 12.66% became the latest U.S. company to cross the $1 trillion milestone in market value as its stock price has more than doubled in the past year on surging sales and rising profit.

Helping Tesla cross the mark Monday was news that Hertz Global Holdings Inc. HTZZ 10.04% had ordered 100,000 vehicles from the electric vehicle maker to stock its rental-car fleet, a major bulk purchase that could help the car company get more of its cars into the hands of mainstream consumers.

In crossing the $1 trillion mark, Tesla joins Apple Inc., Microsoft Corp. , Amazon.com Inc. and Google-parent Alphabet Inc. Facebook Inc. was part of the group, though its share price has since retreated. 

Tesla, which last week posted its third consecutive quarter of record profit, is now valued more than the next nine largest auto makers by market cap.

Tesla’s stock hit an intraday high of $998.74, giving it a market value of $1.004 trillion. 

The stock has since slid to $994.48, up 9.3% on the day. 

Any close above $995.753 would put it above the milestone.

The Tesla order is part of a broader effort by Hertz to give customers more battery-powered options on rental-car lots.

The Estero, Fla., company said that starting in early November and expanding through the end of the year, Hertz customers will be able to rent a Tesla Model 3 at airports and other locations in major U.S. markets and some cities in Europe.

Electric vehicles will comprise more than 20% of the company’s global fleet with the current order, Hertz said Monday. 

The rental-car company said it introduced electric vehicles into its fleet in 2011.

Tesla’s stock surged around 7% in Monday morning trading, lifting the company’s shares to an intraday high of $979.80.

The order represents a major chunk of Tesla’s annual production volume, which has been growing in recent years.

The electric-car maker produced more than 509,000 vehicles last year, delivering about half a million of them globally in 2020, according to company filings.

Analysts expect those numbers to continue climbing as the company aims to start making vehicles at two new factories this year. 

Based on its deliveries through September, it is in a position to deliver nearly 900,000 vehicles to consumers in 2021 and analysts forecast shipments to rise to 1.4 million in 2022 as the new factories start cranking out vehicles.

The purchase, which would make hot-selling Teslas available to rental customers, could also help Hertz elevate its profile as it anticipates relisting on a major stock exchange by the end of the year. 

Hertz shares, which currently trade over the counter, rose more than 7% to $26.45.

Hertz said it is also installing thousands of electric-vehicle chargers in its network. 

Those who rent a Tesla Model 3 will have access to 3,000 Tesla supercharging stations in the U.S. and Europe, the company said.

Hertz said it expects a combination of level 2 and DC fast charging in about 65 markets by the end of 2022 and more than 100 markets by the end of 2023.

“Electric vehicles are now mainstream, and we’ve only just begun to see rising global demand and interest,” said Mark Fields, Hertz’s interim chief executive. 

Mr. Fields, a former Ford Motor Co. CEO, took the role earlier this month.

Financial terms of the deal between Hertz and Tesla weren’t provided. 

Based on list prices, the cost to Hertz would top $4 billion; however, historically it is common for such bulk orders to include a discount for the rental-car company.

Hertz is making the investment after emerging from bankruptcy under new ownership. 

It filed for bankruptcy in May 2020 as the debt-laden company suffered from a collapse in reservations.

As part of its restructuring, Hertz exited bankruptcy with more $5.9 billion in new equity capital, a large portion of which was raised by new owners Knighthead Capital Management LLC and Certares Management LLC. 

At the end of June, it had $1.82 billion in cash and cash equivalents, according to company filings.

The rental-car firm is looking to raise more capital through a stock offering planned for the fourth quarter of this year. 

Hertz, which revealed the offering earlier this month, said the terms haven't yet been determined. 

It intends to list its common stock on the Nasdaq under its pre-bankruptcy symbol “HTZ.”

The expansion into electric vehicles is part of what the company defines as “the new Hertz,” which focuses on electrification, shared mobility and a digital-first experience, the company said. 

Hertz’s new owners seek to overhaul the century-old company, implementing new software to improve inventory management and better forecast customer demand.

Hertz warned that efforts to electrify its fleet could be hampered by factors outside its control, such as the shortage of semiconductor chips and other constraints.

The company said it has partnered with Super Bowl champion Tom Brady for a marketing campaign for the electric-vehicle rentals.

Bloomberg News reported on Hertz’s order earlier Monday.

Within the past year, Hertz’s business has bounced back as travel restrictions were lifted and more Americans got Covid-19 vaccines. 

At the same time, Hertz and other rental-car companies have struggled to keep up with the surge in bookings, lacking vehicles to provide customers as the broader car business confronts a shortage of new vehicles. 

The shortfall has pushed up rental-car prices and left renters with fewer options.

Tesla is building a network of charging stations for its vehicles to augment those that some owners are having installed at their homes to get power into their vehicles. 

Tesla users, at times, have complained about long wait periods at charging facilities.

“While we certainly have work to do in expanding capacity in some congested areas, average congestion on the network has decreased over the past 18 months,” Tesla’s head of engineering, Andrew Baglino, said on an earnings call this month. 

The Tesla charging network, he said, has doubled over the past 18 months and the company plans for it to triple over the next two years.

Tesla says on its website that it has more than 25,000 charging stations world-wide, principally in North America and Europe.

Tesla Chief Financial Officer Zachary Kirkhorn said on the earnings call that the first customer deliveries from the two new factories—one near Austin, Texas, and another in Germany—aren’t necessarily expected this year and that the pace at which production scales up is still somewhat uncertain.

While the Hertz deal should allow more people to drive Teslas, it comes as scrutiny of Tesla’s advanced driver-assistance features has intensified. 

On Monday, the head of the National Transportation Safety Board doubled down on earlier criticism, chastising Tesla for not addressing what the agency views as safety deficiencies in the company’s driver-assistance technology.

“[O]ur crash investigations involving your company’s vehicles have clearly shown that the potential for misuse requires a system design change to ensure safety,” NTSB Chair Jennifer Homendy said in a letter to Tesla Chief Executive Elon Musk.

The NTSB investigates crashes and makes safety recommendations but doesn’t have regulatory authority. 

The agency has urged Tesla to take additional steps to limit how drivers are able to use the company’s advanced driver-assistance technology, which doesn’t make vehicles autonomous.

Tesla didn’t immediately respond to a request for comment about the letter.


—Rebecca Elliott contributed to this article.

 When Tools Stop Working

By John Mauldin 


Because I believe in the division of labor, I rarely use hand tools today. 

In the ‘80s and ‘90s, I had two 4 x 8 pegboards on my garage wall full of tools along with my large Craftsman toolbox. 

I had the right tool for every job around the car, house, and yard. 

I worked on the plumbing, electricity, built rooms, and flooring. 

My current friends might not believe it, but I was quite handy back then. 

It was almost a bit of a fetish.

Now, I know others can wield them more efficiently and I’m pleased to let them do so. 

My tools of choice today are my computers, iPad, and phone. 

I am much more productive with my current tools than trying to fix a light switch.

The right tool in the right hands can do miracles. 

However, it gets more complicated when you want to work on the markets and the economy. 

Hammers work because nails don’t unpredictably reshape themselves. 

The economy does. 

Fiscal and monetary authorities must rely on tools that don’t work consistently and may not work at all. 

As we’ll discuss today, this is a big part of our current dilemma.

We’d all like to think it has an easy explanation and a quick solution. 

Readers tell me all the time: “John, the problem is really ______.” 

Unfortunately, it’s not one problem. 

We face a swirling mess of different problems, interacting in ways we don’t fully understand. 

We do have some clues, though. 

It now looks more and more like August/September marked some kind of turning point. 

Economic data has weakened considerably since then.

You know what I think of economic models, but they have a kind of objectivity. 

The numbers do what they do. 

It’s probably important that the Atlanta Fed’s third-quarter GDPNow estimate crumbled from 6.1% as of August 23 to 0.5% on October 18. 

That’s a whale of a change in less than two months.


Source: Atlanta Fed

Note the chart also shows a consensus of private forecasts dropping at the same time, though not quite as dramatically. 

Clearly something changed in the last 60–90 days. 

Here are some possible factors, in no particular order.

  • Increasing supply chain snarls
  • Jumping energy prices
  • COVID-19 Delta variant case surge
  • Evergrande and China housing crackdown
  • A hasty US Afghanistan withdrawal
  • End of enhanced US unemployment benefits
  • Difficulties for pending infrastructure bills
  • Oh, yes, the return of 5%-plus inflation which deducts from Nominal GDP to get Real GDP.

We can’t pin it on any one of these. 

They all had some influence, along with others not listed, adding up to the lower growth estimates. 

And let’s note, “lower growth” isn’t the end of the world. 

If Q3 real GDP growth is 0.5%, it won’t be what we hoped but it won’t be recession, either.

The economy is performing well in many ways. 

Plenty of jobs are available, new businesses are being launched, companies are profitable (third-quarter earnings season has started off with a bang!) and stock prices are strong. We could do much worse. 

But we could also do better, and the missed opportunities are frustrating.

Today’s letter will be the first of at least two parts. 

Next week I’ll describe where I think this is heading, and how we still have a chance to save the recovery if certain people/institutions make the right choices. 

But first, I want to establish three important points. 

They are foundational to my outlook. Here they are, summarized in one sentence.

We are facing demand-driven inflation as a consequence of misguided monetary policy and misdirected fiscal stimulus.

That may sound simple and obvious, but this one short sentence has a lot to unpack. 

We’ll start below.

Demand Is Booming

Last week I wrote about the growing Logistical Sandpiles problem. 

It shows no sign of improvement. 

That’s not good, but I think this situation is also a clue to our deeper problems. 

The ports and railroads are clogged because the economy is demanding more goods, and this demand is driving inflation pressure.

My friend Jim Bianco explained what is happening in a magnificent Twitter thread you should read. 

I’ll excerpt his key points and charts below.

“The Los Angeles and Long Beach ports collectively unload just under one million containers a month. For the last year, they have been running at/near a record pace.

In other words, they are running as fast as they can. The problem is they are at their limit.”


Source: Jim Bianco

“There are also problems getting these containers off the dock.

Unfortunately, there is a trucking shortage, which has led to soaring trucking rates (chart below). 

Demanding more trucks at 3 am to get these unloaded containers off the dock is going to be a taller order.”


Source: Jim Bianco


“This is leading to a backlog of ships anchored off LA. 

And since these containers are taking longer to unload, shippers now have to factor in this dead time anchored off shore. 

This is a disincentive to ship, so the number of empty containers are piling up in the ports.”


Source: Jim Bianco


Source: Jim Bianco

“This is leading to a recent fall in container rates. 

No one is in a hurry to ship these containers back to China for reuse if they are going to just sit anchored off LA for many days. 

Then one has to struggle to find a truck to haul it away.”

After illustrating the problem, Jim explained the cause.

“Simply, demand is booming. 

Below is personal consumption since ‘09, its trendline, and residuals (actual-trend). 

Consumption is off the charts at $662B > trend.

Again, we want a record amount of stuff and the supply chain cannot handle it.”


Source: Jim Bianco


Interestingly, Paul Krugman highlighted some of the same problems but he notes a different distinction: Consumers have shifted their buying from services (experiences) to materials and specifically durable goods.


Source: The New York Times

This makes sense as the government sent trillions of dollars of “hot money” directly to consumers and/or businesses. 

Restaurants, hotels, and airlines were generally off the market, vacations were crimped, so people bought “stuff.” 

Thus, those ships off the shores of California contain extra goods that both manufacturers and shippers hadn’t planned for.

Jim thinks prospects for near-term relief are nil, and it will generate more inflation.

“Many assume increasing the throughput of the supply chain to meet overstimulated demand over the short term is doable.

But if the problem is the supply chain is at capacity now, expanding will be hard/impossible over the next several months. (JM: And if you are a business, do you increase your capacity for what will likely be a short-term demand increase?)

So to bring everything into balance, prices will rise until enough demand is destroyed to bring everything into line with the limits of the supply chain.

We might be seeing this happening as Q3 growth expectations are crumbling as prices are soaring.”


Source: Jim Bianco


Source: Jim Bianco


John here again. 

Let me add a couple of notes. 

First, as noted above, the consumption growth Jim describes is partly a consumption shift. Thanks to COVID, Americans have reduced spending on services (restaurants, concerts, hotels, airlines, etc.) and spent more on goods. It’s pretty clear in the inflation data.


Source: Tony Sagami

In barely more than a year we reversed a shift that unfolded over decades. 

Of course it’s not going smoothly!

Second, it would be nice to know more specifically what is in all these containers. 

I suspect a big part of it emanates from housing construction growth. 

Building materials are bulky and consume a lot of shipping capacity relative to their value. 

New homes, once occupied, also spark many other purchases: furniture, lawnmowers, garden hoses, etc.

If I’m right on that, then a break in the housing boom might have a swift effect on the supply chain problems. 

But right now there is no sign of such, in part because the policies driving it aren’t changing. 

Which brings us to my next big point.

Running It Hot

Traditionally, the Federal Reserve prevents the economy from overheating by taking away the punchbowl, as the old saying goes. 

That skill set seems to have atrophied from disuse. 

Understandably so, too. 

We have seen nothing you could reasonably call “overheating” since the 1990s. 

Surging first-half 2021 growth simply recovered the prior year’s decline, more or less, and now seems to be ending.

So the current generation of Fed leaders and staff has spent years looking for ways to fill the punchbowl. 

They have long talked of letting the economy “run hot,” tolerating higher inflation for some extended period that would balance out years of lower inflation.

If that’s your perspective, then the idea this post-COVID period would bring only “transitory” inflation was likely disappointing. 

Look at Jim Bianco’s chart above, and you’ll see it has been many years since core CPI stayed above 2.5% for very long, and it’s often been well below. 

These last few months, while sharply higher, are still nowhere near restoring long-term “normal” inflation.

In my view even 2% inflation is too much. 

Some officials at least claim to be concerned about current levels. 

But as an institution, the Fed doesn’t seem to think the party is out of hand. 

They are certainly doing nothing to stop it.

Yet the supply-chain inflation Bianco describes is partly a result of the Fed’s actions since early 2020. 

Their initial dramatic moves were appropriate. We were in an unprecedented situation that could have destabilized the banking system. 

That risk passed pretty quickly, leaving a garden-variety recession they could have addressed without the drama. 

Yet their crisis programs and policies are still in place today. 

Why? 

I see two reasons.

First, they’re using new tools (like loan guarantees) because the old tools don’t work anymore. 

Debt loads, both public and private, are so gigantic that injecting more money no longer has the stimulative effect it once did. 

Lacy Hunt says declining velocity is key to this. 

They can create liquidity but they can’t force banks to lend, or businesses and consumers to borrow. 

Here’s Lacy in the most recent Hoisington quarterly.

“As velocity declines, each dollar of money produces less GDP. 

The drop in velocity to lower levels indicates that monetary policy becomes increasingly asymmetric in its capabilities. 

While tightening operations are effective, Fed actions to support the economy are largely counterproductive even when they are novel in scope and massive in size. 

Benefits can accrue but their impact on economic growth has proved to be extremely minimal.

The Fed is able to increase money supply growth but the ongoing decline in velocity means that the new liquidity is trapped in the financial markets rather than advancing the standard of living by moving into the real economy.”


In other words, the Fed can still take away the punchbowl but is unable to refill it. 

They don’t want to take it away because they have this fantasy it will eventually work. 

So they are keeping short-term rates at zero and buying $120 billion in bonds every month, along with assorted other programs. 

You can see what it’s done to their balance sheet.


Source: Reuters

That $120 billion monthly bond buy goes $80 billion to Treasury securities and $40 billion to mortgage-backed securities. 

This is a giant rate subsidy to the federal government’s borrowing as well as home buyers. 

No surprise, both have been adding leverage. 

And as noted, the latter group is probably aggravating the supply chain problem.

All this monetary stimulus had some effect, of course, but the latest growth forecasts suggest it is already dissipating. 

The Fed did so much, so fast, it produced a self-limiting recovery in which supply-chain inflation caps potential growth.

That’s not good, but we have another culprit.

Bipartisan Failure

In March 2020, with COVID-19 spreading in the US, no one really knew what to expect. 

Just as the Fed was right to aggressively protect the financial system, the federal government acted correctly to help the millions who lost jobs and income. 

But details matter, and time is showing the stimulus programs were poorly designed and often counterproductive.

Let’s start with the core problem: They got the goal wrong. 

The target shouldn’t have been to stimulate the entire economy, but to maintain the status quo for affected individuals. 

At the time we (wrongly) thought a few weeks of inactivity would suffice. 

The goal should have been to replace the lost income and only the lost income, for the people who actually lost it.

But as a practical matter, that was apparently too hard. 

So instead we pushed them into an unemployment insurance system unprepared for the task and added a flat $300 weekly supplement that was more than some people needed and not enough for others. 

Then we also sent checks to almost everyone (excluding the highest income groups) whether they needed them or not. 

Then we did it again in late 2020, and again in 2021.

Note, this was a bipartisan policy failure. 

The first two COVID relief bills, totaling over $3 trillion, passed a Democratic House and Republican Senate. President Trump signed both. 

President Biden and a Democratic House and Senate added $1.9 trillion more. Everyone’s fingerprints are on this.

But whoever you blame, this money had a giant effect on consumer spending. 

Not all of it was bad. If the government is going to kill people’s jobs, it can at least help them buy groceries. 

The problem is that large amounts went not to basic needs but to discretionary luxuries, some of which are on those ships the ports can’t unload fast enough.

Easy Money

I have been trying to explain for years the subtle difference between QE (Quantitative Easing) and outright money printing (MMT). 

Essentially, the Fed does not buy government debt directly from the government. 

They go into the open market and buy it from people/institutions that originally bought that paper at Treasury’s auctions.

Typically, the money the Fed uses to buy that debt goes back on the Fed’s balance sheet as excess bank reserves. 

You can zoom in on the chart below and see what looks like a flat line up until about 2009 is actually composed of very tiny bumps. 

A small amount of “excess reserves” was normal. 

Then they started QE in 2009 and the amounts exploded. 

They began slowly tapering down in 2018 until the amounts jumped again from the COVID QE.

Again, in theory, banks could lend this money. 

That is not happening. 

It is ending up in margin accounts and other products, directly or indirectly boosting the stock market. 

That easy money policy coupled with extremely low interest rates is boosting home prices, exacerbating wealth and income disparity.


Source: FRED

Low interest rates are of limited help to first-time homebuyers when the average price goes from $380,000 to $420,000 in a little over a year. 

This is what happens when government, in this case the Federal Reserve, meddles in the market, albeit with good intentions. 

Now, if you already own a house that’s rising in value, you are not upset. 

But if you are trying to buy one the Fed is making it harder on you. 

It’s a corollary to financial repression.

An intended consequence? 

As many as 25% of homes are now being bought by yield-seeking funds that will rent them. 

When bonds no longer even keep up with inflation, investors look for other ways to get yield. 

And residential real estate offers not just yield but depreciation. 

That would not be possible or even necessary if Treasuries were 2½%.


Source: FRED


So where is the inflation coming from if it is not directly from QE? 

It is coming from the $6 trillion in high-powered Fed money plus fiscal stimulus spending. 

That money did not end up on the Federal Reserve balance sheet; it went directly into consumers and some businesses. 

The stimulus programs are the real helicopter money that Ben Bernanke mentioned almost 20 years ago.

For the record, I agree with Lacy Hunt. 

We will eventually go back to a slow-growth, disinflationary environment. 

I think real GDP will likely average 1% for the rest of this decade because of the debt burden. 

But in the meantime, until the stimulus and supply chain issues work out, until we figure out how to entice potential employees back to work, we’re going to have to deal with uncomfortably high inflation.

This from Grant Williams’ recent Things That Make You Go Hmmm:

Not only that, but recent comments by Fed officials suggest the Fed is trying to gently convince their adoring public that inflation may actually turn out to be “a little stronger than they forecast for a little longer than they forecast.” 

Sigh.

As you can tell, this is a vast problem with many moving parts. 

It has other elements I haven’t mentioned today, too. 

Like, for instance, low interest rates and quantitative easing can’t solve supply chain issues, microchip shortages, or changes in the labor market.

Together, the federal government and the Federal Reserve have put us all in a jam with no good alternatives. 

Yet we do have options. 

They aren’t great but would let us avoid the worst. 

I’ll describe them for you next week.

New York and Dallas

I had planned to be in New York next week, but circumstances changed. 

I will be in NYC beginning November 7 for a packed week of meetings and for my friend David Bahnsen’s launch party of his new book There Is No Free Lunch. It is going to be a powerful book. 

Then on to Dallas/Granbury for Thanksgiving.

I mentioned Jim Bianco’s powerful Twitter thread, which I quoted and made sure all those who follow me had a chance to read. 

Frankly, you should follow me on Twitter as much for the links I provide as well as my own commentary.

Halloween in my neighborhood, which has lots of kids, is interesting. 

This is a golf community so the parents and kids go from house to house by golf carts, often fabulously decorated. It is really quite fun. 

I think Halloween is Shane’s favorite holiday, and she really enjoys all the kids. 

She even gets me into the spirit, so to speak.

I have been busy with all sorts of things, and got undermined as my internet went down for a few days. 

We now have backup hotspots and it looks like I might even be able to get more reliable fiber-optic soon.

It’s time to hit the send button so let me wish you a great week and the start of a wonderful holiday season.

Your convinced the Fed has made a monetary policy mistake analyst,



 

John Mauldin
Co-Founder, Mauldin Economics

The bull case for investing in China

Long-term investors know patience may be rewarded with strong gains

Jeffrey Kleintop

The regulatory changes shaking China’s stock market are not uncommon and often are followed by rebounds in share prices driven by broadly favourable policy actions © AP


For many investors, recent regulatory actions by China have been unnerving. 

It has sparked fears that the country has made a sudden and risky policy shift that is anti-business and anti-investor.

The slow slide in China’s stock market from its February peak sharply accelerated in the third quarter. 

Investors seemed to switch from calmly interpreting regulators’ actions as only focused on a few big tech firms to alarm that no industry is isolated from a sudden rush of regulatory reforms.

Fears spread that changes aimed at reining in the excess leverage of property developers, such as Evergrande, could bring the risk of a financial and consumer meltdown.

The truth is that the rapid and targeted regulatory changes shaking China’s stock market are not uncommon and often are followed by sharp rebounds in share prices driven by broadly favourable policy actions.

In fact, this year’s peak-to-trough retreat of 33 per cent in China’s stock market is close to the 28 per cent average annual drawdown over the past 20 years, measured by the MSCI China Index.

It can be easy to forget that there is a bear market nearly every year in Chinese stocks (17 of the past 20 years), usually driven by some policy issue.

Historically, investors have tended to be compensated for this heightened volatility with strong annualised total returns. 

From August 2001 to August 2021, the MSCI China Index produced an annualised total return of 12.3 per cent, outperforming the 9.3 per cent produced by the S&P 500.

Investors’ concerns have been focused on sectors that are being negatively affected by China’s new regulations — internet, education and gaming, for example. 

Many of the issues China is targeting are also in the crosshairs of policymakers in Washington or Brussels but changes are slower. 

In China’s one party state, things can seem to happen overnight and be temporarily jarring to markets.

But the regulatory tightening worrying the markets is only one side of the coin. 

There are also sectors that are being supported by the government — such as semiconductors, green technologies and consumer brands. 

In other words, the government is attempting to restructure the economy and not solely crack down on private business.


There is plenty of entrepreneurship in China driving growth outside the areas being targeted for reform by the government. 

In fact, China’s economy is now almost entirely driven by private businesses.

Almost 87 per cent of employment in China is in private companies and private firms also account for 88 per cent of China’s exports, according to data gathered by consultants McKinsey.

In China’s case, it has some unique characteristics that reduce the threat of a crisis: the Chinese government controls both sides of the banking system (lenders and borrowers).

The largest borrowers are state-owned enterprises, and China’s reliance on internal sources of funding makes it more resilient. 

China’s vast domestic capital means it is not very vulnerable to a sudden withdrawal of capital by foreigners that would shock the economy into a recession.

On the lender side, the government holds sizeable stakes in the large, systemically important banks and could recapitalise them in the event of a crisis. 

Additionally, Chinese banks do not appear to have used leverage and derivatives to the extent western banks did in the years leading up to the financial crisis in 2008.

Longer-term investors in emerging market stocks might draw some degree of comfort knowing that the bear market in China is tied to near-term policy uncertainty, rather than a broader economic downturn that could linger.

Other emerging markets have not followed along in the bear plunge, with emerging market stocks excluding China still up more than 10 per cent this year to September 27.

Timing moves in any market is difficult and China can be even more challenging. 

There is risk that the regulatory rollout may continue, property prices could fall and undermine consumer confidence, not to mention the potential for Covid-19 related concerns and the tense US-China relationship to weigh on the growth outlook.

Yet, the potential for the regulatory intensity to ease without leaving significant economic damage suggests the balance of risks could be tilted to the upside from current levels.

High volatility is one reason why having a long-term perspective is especially important for emerging market investors. 

Long-term investors in emerging markets such as China know that patience may be rewarded with strong gains.


The writer is chief global investment strategist at Charles Schwab. 

Climate Policy Meets Cold Reality in Europe

The rush to renewables causes severe energy price spikes and shortages. Biden’s policies would do the same in the U.S.

By Allysia Finley

        PHOTO: CHAD CROWE


European leaders at the United Nations last week applauded themselves as they doubled down on their pledges to slash CO2 emissions. 

And Prime Minister Boris Johnson said the U.K. “will lead by example, keeping the environment on the global agenda and serving as a launch pad for a global green industrial revolution.” 

Such vows of carbon chastity are, to say the least, ironic as Europe grapples with a severe energy shortage and surging prices wrought by its green industrial revolution.

In the past decade the U.K. and Europe have shut down hundreds of coal plants, and Britain has only two remaining. Spain shut down half of its coal plants last summer. 

European countries have spent trillions of dollars subsidizing renewables, which last year for the first time exceeded fossil fuels as a share of electricity production.

But renewables don’t provide reliable power around the clock, and wind power this summer has waned across Europe and in the U.K., forcing them to turn to gas and coal for backup power. 

Yet demand for these fossil fuels is also surging across Asia and South America, where drought has crimped hydropower. 

Manufacturers there are also consuming more energy to supply Western countries with goods.

Japan has become especially dependent on liquefied natural gas imports since it shut down most of its nuclear power plants after Fukushima in 2011. 

Even China has been forced to ration electricity to energy-hungry aluminum smelters because of a coal power shortfall. 

This has sent global aluminum prices soaring.

Increased global demand has caused the price of coal to triple and the price of natural gas to increase fivefold over the past year. Europe’s cap-and-trade scheme has pushed prices even higher. 

Under the program, manufacturers and power suppliers must buy carbon credits on an open trading market to offset their emissions. 

The price of credits has spiked this year as demand for them from coal plants and other manufacturers has increased while government regulators have tightened supply.

Russia is exploiting Europe’s energy difficulties by reducing gas deliveries, perhaps to pressure Germany to complete certification of its Nord Stream 2 pipeline, which bypasses Ukraine. 

Russia’s Gazprom has booked only a third of the available transportation capacity through its Yamal pipeline for October and no additional deliveries via its Ukraine pipeline. 

Europe has become ever more dependent on Russia—the world’s second largest gas producer, after the U.S.—for energy because the U.K. and Germany have banned hydraulic fracturing, letting their rich gas shale resources go to waste. 

Meantime, the Netherlands is shutting down Europe’s biggest gas field.

In short, all of Europe’s green chickens are coming home to roost. 

Several U.K. retail electricity providers have collapsed in recent weeks because of the surging price of gas. 

Energy experts warn that some German power suppliers are in danger of going insolvent. 

Germany’s electricity prices, which were already the highest in Europe because of heavy reliance on renewables, have more than doubled since February.

Skyrocketing power prices have caused U.K steel makers to suspend production. 

A former energy adviser to the U.K. government warned last week that the country’s energy shortage this winter could prompt a “three-day working week”—a reference to the coal and rail worker strike in 1974 that caused the government to ration energy for commercial users.

The European Steel Association has warned that the Continent’s producers are becoming globally uncompetitive. 

Fertilizer producers, which use gas as a feedstock, are raising a fuss. 

Norway’s Yara International plans to curb 40% of its fertilizer production capacity in Europe. 

U.S.-owned CF Industries earlier this month halted operations at its fertilizer plant in northeast England, threatening downstream businesses.

Beer and soda manufacturers use the carbon dioxide that is generated as a byproduct of fertilizer production for fizz. 

Carbon dioxide is also used to stun livestock before they are slaughtered, as well as for vacuum packs and dry ice to store frozen foods. 

The U.K.’s Food and Drink Federation has warned that consumers might soon notice products missing from supermarket shelves from the carbon-dioxide shortage.

The warning prompted the U.K. government last week to lend financial support to CF Industries. 

European metals producers are asking governments for aid. 

There will be more bailouts as European energy demand heats up this winter. 

These energy woes will only get worse in the coming years as governments push harder to purge fossil fuels.

U.S. gas and coal producers have benefited from rising prices in Europe. 

Growing exports, however, are pushing up prices that Americans pay for energy because domestic production lags pre-pandemic levels. 

Natural-gas prices in the U.S. have doubled since the spring, and some coal power plants are scrounging for fuel.

Europe offers a portent of the havoc to come under the Biden administration’s policies that aim to shut down fossil-fuel production and power the U.S. grid exclusively with renewables. 

Democrats won’t succeed in banishing fossil fuels. 

Instead the U.S., like Europe, will need more gas and coal to back up renewables, and the U.S. will become dependent on adversaries like Russia for energy.


Ms. Finley is a member of the Journal’s editorial board.